MSME loans play a huge role in helping small businesses. Small businesses face many challenges regarding securing adequate working capital, expanding operations, and buying new machinery or raw materials to build inventory.

What is an MSME loan?

MSME loans are unsecured Micro, small, and medium enterprise loans offered by several financial institutions to help entrepreneurs and business owners meet business-related expenses. They are credit facilities that banks or non-banking companies (NBFCs) provide to small or medium-sized businesses to meet their expenses.

After reading this guide, the reader will have a clear understanding of:

• What are MSME loans?
• Importance of MSME loans
• Types of MSME loans
• Eligibility criteria for MSME loans
• Documentation required for MSME loans
• MSME loan application process
• MSME loan Interest rates and charges
• Government schemes for MSME financing
• Digital and online application procedure
• MSME loan repayment strategies

Importance of MSME loans

MSME loans play a huge role in helping small businesses and startups, as they face many challenges regarding securing adequate working capital, expanding operations, and buying new machinery or raw materials to build inventory.

Traditional loans can be a good source of funds, but there are also some challenges that the business owner faces while applying for them. One of the biggest challenges is that they require a lengthy process, and banks sometimes hesitate to lend money to small businesses that don’t have a strong credit history. However, MSMEs help business owners since these loans help them maintain a steady cash flow. It also enables them to invest in equipment and technology to expand their business operations.

Indian MSME sector

In India, over 99% of total MSMEs qualify as micro-enterprises, comprising 630.5 lakh enterprises. There are a total of 3.3 lac businesses that qualify as small businesses, i.e., 0.5% of all MSMEs, and just 0.05 lakh qualify as medium businesses, that sum of 0.01% of all MSMEs

Categories of MSME loans available

MSME loan for new business

Small and newly launched businesses often have difficulty running smoothly because they find it difficult to secure funding. MSME loans help them become financially stable.

MUDRA Loan

Mudra Loan was launched in April 2015. It offers loans up to 10 lac INR to non-farm small enterprises and startup companies. MUDRA is a non-banking financial company (NBFC) that supports MSME growth by refinancing banks, microfinance institutions (MFIs), and NBFCs for micro-unit lending.

MSME machinery loan

Businesses often require advanced machinery and equipment to enhance productivity. The Indian government offers over twenty financial support programs that help MSMEs acquire expensive machinery. These schemes provide subsidies and affordable loans for new or second-hand machinery purchases. Some schemes are the Credit Linked Capital Subsidy Scheme (CLCSS), Technology Upgradation Fund Scheme (TUFS), etc.

Women empowerment schemes

To encourage women-led businesses, many banks and financial institutions offer MSME loans for women entrepreneurs with Lower interest rates and reduced collateral requirements. The government has introduced different schemes, such as the Annapurna scheme, the Dena Shakti scheme, and the Stree Shakti scheme, to help women start new businesses. The Anupama scheme is for those women entrepreneurs setting up the food catering industry to sell packed meals. The maximum amount of money granted through this scheme is 50000 INR, which must be paid back in 36 months through installments. The Dena Shakti scheme is for women who start businesses in the agriculture field. The street Shakti scheme is for women with a 50% firm or business ownership share.

Eligibility criteria for MSME loans

Businesses must meet some conditions to secure an MSME loan. Some of the requirements that the companies must meet are:

Credit score:

The credit score of the business must be 750 or above.

Yearly income:

The business’s yearly income must be at least 2 lac INR, and its turnover must be around 10 lac INR annually.

Repayment history:

Businesses must have a credible repayment history. They must also be financially stable.

Previous loans:

The business should not have taken any previous loan from a financial institution.

Business registration:

The business must be registered under all applicable certifications, including goods and service tax (GST).

Applicant age:

The authorized signatory must be under 21 to 65 years of age to take a loan.

The working period of the applicant:

The applicant must have worked in the company for at least 3 years and have 5 years of experience in the respective field.

Which banks give MSME loans:

In India, several banks give MSME loans, e.g.:

• State Bank of India (SBI)
• Industrial Credit and Investment Corporation of India (ICICI) bank.
• Axis bank
• Bank of Baroda (BOB)
• Ujjivan Small Finance Bank
• Canara bank.
• Punjab National Bank (PNB)

Documentation required for MSME loans

When applying for MSME loans, people must provide certain documents. The proper paperwork guarantees a seamless approval procedure and avoids delays. Furthermore, there is a better probability of obtaining the loan more rapidly if sufficient evidence is provided.

The documents are required to verify the business owner’s identity, financial health legitimacy, etc. Some of the necessary documents include:

Identity and address proofs:

The business owners must provide legitimate identification documents, such as utility bills, proof of address, a passport, or a PAN card. These documents enhance the business’s legitimacy and trustworthiness documents.

Financial Statements:

Businesses must present financial statements that include the income sheet, expenses for the previous six months, and the balance sheet (a description of the company’s assets and liabilities) in the prior year.

Certificate of incorporation:

The businesses are also required to submit a certificate of incorporation.

Gst certification:

Companies must also submit the certificate of GST registration.

Annual return: Every year, corporations must submit an annual return to the Ministry of Corporate Affairs (MCA) that reviews their operations and gives insight into their current state. It also contains information about the firm’s registered office, shareholders, and directors.

Loan specific documents:

Businesses must also submit a loan application form, their business plan, and quotations from suppliers if they are taking the loan to purchase something. These documents help the lender verify the purpose of taking a loan.

MSME Loan interest rates and charges

MSME interest rates vary depending on lenders, loan type, and borrowers’ creditworthiness. Generally, they range from 8% to 18% per year and depend on factors like business annual turnover, loan history, etc.

Bank-specific MSME loan rates:

The loan interest rates depend on the banks. For example, the Sind Bank’s interest rate starts at 9.05%, the Punjab National Bank’s interest rate starts at 9.60%, the State Bank of India’s interest rate starts at 8.25%, and the Bank of Baroda’s MSME loan interest rate starts at 8.4%.

Msme loan application process:

Individuals can apply for the MSME loan both online and offline means.

Prerequisites of MSME application:

Businesses must determine the purpose of the loan before applying for it. They must also calculate how much they are required to run their operations smoothly and meet their expenses. Moreover, they must check whether they are eligible for that specific loan scheme since choosing the wrong one can lead to the rejection of the application or further audits. Choosing the right lender is also essential since every lender has different interest rates and processing fees, which can affect the company’s finances if the interest rate is too high. By Following these key points, borrowers can avoid delays in application approval.

Online application procedure

To apply for the MSME loan online, the business owner has to follow the steps given below:

Step 1: log in to the website:

Firstly, they need to visit the bank’s website or the lender personally, select the MSME loan scheme, and click the “apply” button

Step 2: application form filling

After clicking the apply button, an application form appears on the screen, which the applicant must complete and submit.

Step 3: application submission

The application is submitted after clicking the submission button, and a bank representative or lender contacts the applicant to verify the loan requirements. They also ask for the documents, if any, to be submitted.

Step 5: application approval:

The MSME loan request is approved once the documents are verified. The lender then sends the applicant an agreement to complete the process.

Step 6: loan transfer:

The loan amount is transferred into the applicant’s account within 48 hours.

Offline application method

The business owner must visit the branch if they want to apply online. Moreover, they must also take all the required documents and fill out the application form. The processing time of offline applications is around 7 to 15 days.

Top banks and financial institutions for MSME loans

Many popular banks in India are offering MSME loans.

SBI SME Smart Score Loan

The State Bank of India is one of the most popular banks in India, offering MSME loans.

The SBI starts at 8.25%, with a processing fee of 0.40%. Under this loan scheme, a business can borrow up to 50 lac INR and must repay the loan in small installments within 7 years.

HDFC bank SME business loan

The loan amount depends upon the MSME loan product type. For example, businesses can take up to 5 crores for a digital MSME loan, and if they have signed up for the CAPEX loan, they can take up to 2 crores INR. The businesses are required to pay back the loan within 3 to 7 years.

Popular Nonbanking financial companies (NBFCs) for MSME loans

Fullerton MSME:

One of the NBFCs in India that is offering MSME loans is Fullerton. Its interest rate is around 17% to 21%. The processing fee is up to 6% of the total loan amount. A business can take up to 50 Lac INR and is required to repay under 12 to 60 months.

LendingKart MSME:

Lendingkart’s interest rate ranges from 15% to 27%, with a 2% to 3% processing fee. The business can take a loan of up to 1 crore and must pay it back in under 36 months.

Government schemes for MSME financing:

MSMEs require funding for growth, so the government of India has launched many loan schemes for their interest.

Pradhan Mantri mudra yojana (PMMY):

Pradhan Mantri Mudra Yojana (PMMY) scheme was launched in April 2015. It offers loans up to 10 lac INR to non-farm small enterprises and startup companies. MUDRA is a non-banking financial company (NBFC) that supports MSME growth by refinancing banks, microfinance institutions (MFIs), and NBFCs for micro-unit lending.

Prime Minister’s employment generation programme (PMEGP):

Through the prime minister’s employment generation program (PMEGP), businesses in the service sector can get a loan of up to 10 lac INR. Businesses in the manufacturing sector can get up to 25 lac INR. The prime minister’s employment generation program (PMEGP) aims to generate self-employment through new micro-enterprises.

Udyogini scheme:

The Udyogini scheme was introduced for women entrepreneurs. Under this scheme, they are allowed to take loans of up to 3 lac INR.

Credit guarantee trust fund for micro and small enterprises (CGT MSE):

It is a credit guarantee scheme for MSMEs. The main objective of introducing the CGTMSE scheme is to provide financial assistance to small and medium industries.

MSME Loans for New Businesses and Startups

Small businesses face many challenges regarding securing adequate working capital, expanding operations, and buying new machinery.

The loan options specifically available for startups help them meet their expenses and ensure the company’s smooth operation.

MSME term loans:

These loans provide funds to businesses for expansion, purchasing machinery, and initial setup costs.

Working capital loans:

Working capital loans help businesses manage their daily expenses, such as salary and rent, and help ensure smooth cash flow.

Equipment financing:

Equipment loans help businesses buy expensive machinery.

Eligibility criteria for new businesses

Generally, businesses are required to submit a financial statement to show their financial history and cash flows. But new companies don’t have any financial history, that’s why they must fulfill some other requirements:

• New businesses must be registered as private or public limited companies.
• The businesses must have been operational for the period required by the lenders.
• The owner must submit their personal information to prove their credibility =.
• A well-documented business plan containing the goals, expected growth in the future, and profitability must be submitted.
• Collateral requirements and collateral-free options for MSME loans:

There are two types of loans

• Collateral
• collateral free.

In collateral loans, the individual has to pledge assets to get funding; on the other hand, in collateral-free loans, they can get funds without pledging any assets, e.g., Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), MUDRA loan, PSB loans.

Types of collateral accepted for collateral MSME loans

Banks and financial institutions accept different assets for collateral-accepted loans, including property, machinery, inventory and stock, fixed deposits (FDs), and investments.

Cash credit (CC) limit:

The cash credit limit is a short-term loan that helps businesses manage their daily expenses. Businesses get a fixed loan approved by the government and can withdraw money in multiple transactions according to their needs.

 Digital and Online MSME Loan Options

As technology advances daily, small and startup businesses can now more efficiently apply for loans online.

Benefits of digital and online MSME loan options

There are many benefits of applying online:

Faster processing: The application is processed quickly, within 24 to 48 hours.

Minimal documentation: Offline application submission is complicated and lengthy, while online application methods are straightforward and minimalistic.

Convenient: Online application filling is convenient since the individual doesn’t need to visit the branch.

Always accessible: Online application filling service is available 24/7.

Industry-Specific MSME Loans

MSME loans are also provided for hospitals, chartered accountants, and other professionals.

MSME loan for hospitals and healthcare:

Doctors, hospitals, and pharmacies can also apply for MSME loans. A well-established hospital can take up to 10 crore INR. The repayment duration is comparatively low for hospitals compared to other sectors.

MSME loan for chartered accountants (CAs)

Chartered accountants can also take loans for their office setup, daily expenses, software purchases, etc. They are allowed to take up to 50 lac INR.

MSME loans for other professionals:

Engineers can also take MSME loans for their business expansion. The loan amount varies based on the business size, revenue, etc. For example, retail businesses can take up to a crore INR, while manufacturers can take up to 10 crore INR.

Tips for Successful MSME Loan Approval

Most individuals face challenges while filing for MSME loans. But they can reduce or altogether avoid them by following some strategies:

Eligibility criteria:

The business must read the eligibility criteria before applying and check whether their company is eligible for the MSME loan.

Explore loan options:

Companies must compare different loan options from banks. Every bank provides other benefits so businesses can choose accordingly.

Strong credit profile:

The business owner must have a strong credit profile since it is a gateway to favorable loan terms.

Choose a suitable loan scheme:

Since the government has introduced different loan schemes, choosing the right one is also very important to avoid delays or rejections.

Maintaining financial statements:

The business’s financial records must be appropriately organized to avoid future difficulties and ensure smooth cash flows.

Timely Repayment:

MSME loans must be repaid on time, ensuring good relationships with lenders and increasing credibility.

 MSME Loan Repayment Strategies

Proper planning of when to repay the loan is also essential. Some businesses fail to repay on time and face high penalties, while some repay the expenses but then can’t meet their daily expenses and are overwhelmed by debts. Individuals can follow some strategies to manage their repayments effectively.

Understanding the loan repayment schedule:

Business owners must consider the loan repayment schedule so they can make all payments on time and use expenses wisely.

Zero-based budgeting:

In zero budgeting, every rupee of the income is allocated to some expense, saving, etc. This way, no extra money is left unplanned, and the business doesn’t carry over previous budgets. The income is allocated to every expense from scratch each time, so loan repayments are treated as a fixed priority.

Expense prioritization:

The business owner must categorize their expenses and identify where to cut back without impacting the business’s operation. This way, they can save money by spending it on less important things and repay the loan on time.

Payment scheduling:

The business owners also must schedule their repayments. They must negotiate with suppliers for payment terms that align with the business’s incoming cash flows. This ensures that cash is available when needed the most.

Make prepayments when possible:

Businesses can also prepay the loans if they generate more revenue to reduce the interest rates.

Maintaining a separate loan repayment fund:

Business owners must set aside a portion of their monthly income profits for loan repayment.

How Finocircle can help you secure MSME loan?

Finocircle is a complete loan consulting service that helps startups, businesses, and entrepreneurs secure MSME loans at the best interest rates under various government schemes and bank offers.

We are a team of dedicated loan experts consulting MSME loan seekers and helping them arrange funds for their projects faster. With our assistance, you can get guaranteed MSME loans, complete loan applications correctly, and have 100% approval.

Conclusion

MSMEs can choose any loan, i.e., collateral or non-collateral, according to their preference. Moreover, they must fill out the application correctly to avoid delays or rejections. As technology becomes more advanced daily, AI could be integrated into the website to help users file loan applications. Moreover, new subsidies and low-interest schemes will be introduced to boost small and new businesses.